5 comments:

If you look at the Taylor rule, it does a balancing act between real GDP growth and inflation and only indirectly controls nominal GDP growth. It should be easy to modify the Taylor rule so it would directly control nominal GDP growth by dropping the inflation term and letting the (Yt-Yt*) term represent measured and desired GDPn instead of GDPr. The coefficients would have to be adjusted also.

It would be interesting to compare this modified Taylor rule with the standard Taylor rule over the last few years. Would this modified TR have instructed the Fed to drop the FFR at a faster rate than the standard TR over the past couple of years?

That is an interesting idea. Athanasios Orphanides did something similar for the period 1966:1-1993:1 and found that nominal income targeting--called natural output targeting in the paper--outperformed the Taylor Rule or simple inflation targeting. I am almost certain a nominal income targeting would have called for more aggressive monetary easing over the last year. here is the Orphanides paper.